ETF Expert

Carl Delfield of ETF XRay recently examined the wide world of telecom. Intriguingly, he discovered dramatic differences between the iShares S&P Global Telecommunications Fund (IXP) and WisdomTree’s International Communications Sector Fund (DGG).

Global Telecom (IXP) is comprised of 35% U.S. companies whereas International Communications (DGG) contains no exposure to U.S. companies. Global Telecom (IXP) is heavily allocated to a single American company, AT&T (18% weighting). Conversely, International’s (DGG) largest holding has a weighting of only 10%.

Based on a greater international presence… and the fact that a single company does not account for too much of the movement of the index… one might be quick to flick the switch on for "International." In fact, for those who want a bit more dividend for the risk, International Communications (DGG) offers roughly 4.1% to Global Telecom’s 2.2%.

So is this a no brainer? Not so fast.

The last 6 months show a curious phenomenon; that is, not only has International Telecom demonstrated more downside risk and less upside gain, but the iShares Dow Jones Telecommunications Fund (IYZ) has beaten both international and global. (Outperformance by 5%-7% points in 6 months is worthy of notice!)

There are other reasons to think twice before dismissing domestic telecom. For example, the iShares Dow Jones Telecommunications Fund (IYZ) trades 300,000 shares or more on a daily basis, providing investors with ample liquidity. In contrast, neither International Communications nor Global Telecom sport the same level of volume, making it more difficult to buy or sell at a desired price point.

There really is no clear-cut winner here; however, as one moves from U.S. to global to international: (1) There tends to be greater volatility in the price of the chosen investment vehicle, and (2) There tends to be higher dividend payments for the greater risk associated with foreign stocks in your mix.

If one is not satisfied with the way that the global index has been constructed, perhaps the best way to get worldwide, large company telecom exposure would be with a combination of the iShares Dow Jones Telecommunications Fund (IYZ) and WisdomTree’s International Communications Sector Fund (DGG). One can decide for one’s self how much risk, foreign allocation and dividend yield is best.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.